Euro drops against pound as opposition to Greek aid grows

Euro drops against pound as opposition to Greek aid grows


Germany's ever tougher talk over the sort of cutbacks Greece must provide to secure a bail-out were deepening the nation's mounting debt crisis on Monday.

The cost of Greek debt was soaring to new highs throughout the trading session. By 14.55pm the cost of the nation's ten year debt was 9.2% while the five year debt was at 10.76%. The spread over benchmark German bunds on the five year debt had reached 8.72%.

The news saw the euro drop to a three month low against the pound to a low of 86.05p.

German chancellor Angela Merkel said today: 'We need a positive development in Greece together with further savings measures. Germany will help if the appropriate conditions are met. Germany feels an enormous obligation towards the stability of the Euro. If Greece is ready to accept tough measures, not just in one year but over several years, then we have a good chance to secure the stability of the euro for us all.'

Her comments were to a degree echoed by French president Nicholas Sarkozy and the president of the European Commission. However, it is Germany that is demanding more detail of cost cutting throughout the coming half decade.

Capital Economics European economist Ben May said Greece is now running out of time as the cost of its debt soars ever higher by the day.

'Germany’s insistence that Greece produces more detailed plans to meet its deficit reduction targets before it receives the €45bn rescue package supposedly sanctioned by the EC on Friday leaves the situation looking extremely precarious.

'While Greece has satisfied the EC that it has sufficient measures in place to cut its budget deficit by around 4% of GDP in 2010, Germany – perhaps not unreasonably -wants more detail on how it will cut the deficit further in 2011 and 2012.


'German finance minister Schaeuble says that he is still “optimistic” that the German parliament will approve the aid package. Note too that some other EC countries may be able to provide some assistance without passing legislation. What’s more, IMF managing director, Dominic Strauss-Kahn, has indicated IMF funds should be available “in time” for Greece to be able to meet its needs.

'Still, the pressure is now on Greece to come up with some convincing plans very quickly if it is get its hands on the aid in time to finance its next major bond redemption on 19 May – with bond yields exploding, there is virtually no prospect that it will be able to do so without help.'

The possibility that Greece may prefer a default - or debt-restructuring as it would undoubtedly be known - to the sort of fiscal tightening Germany is demanding is an ever present worry for markets.

Anrew Garthwaite, a strategist at Credit Suisse, said that if that does happen Europe will need to act quick to create a stopgap. 'If there is a voluntary default in Greece, there needs to be a huge IMF/EU backstop for the rest of Europe in order to avoid contagion. We do not think Spain is anywhere close to being in the same position as Greece.

'The key barometer of contagion will be the Spanish/bund spread which at the moment is only at 0.9%. if there is a voluntary default in Greece without any ring-fencing, this could lead to rolling attacks on the rest of peripheral Europe as well as de-leveraging.'


source: citywire.co.uk